School Finance:

… and most exciting topics for District 220 community membersOne of the most important …

School Finance Is A Complex Issue

Let’s try to make sense of the system:

How Much Can A School District Request In Total?

How Does The GovernmentDetermine Your Share

Of The Total?

Let’s try to make sense of the system:

Why Can’t The DistrictMake Do With What They Have?

What Does The District Do To Make Sure They Are Economizing And Using Our ResourcesWisely?

How Much Can A School District Request And How Much Can It Go Up Each Year?

• School Districts Formulate Their “Budget” And “Levy”

• It Is The Total Amount It Will Collect From All D220 Taxpayers

• Can Increase By “Inflation” - National Consumer Price Index (CPI)

• District also gets to tax new development (“new EAV”)

What you need to know about the “tax rate”

• It is the amount the voters have agreed to pay for a service.’

• Agreed by “referendum” vote

• Often expressed as dollars and cents in Gov’t. lingo.

• 1 Dollar = 1% of Your “EAV” (Gov’t. Def. Of Home Value

• 1 Cent – 1/100 of 1% of your “EAV”

• The tax rate is determined after you know what the total amount of money that the district can request and what the total value of property within the district.

• Tax rate is total amount the district can request divided by the total value of property within the district.

TERM #1 - TAX RATE

TERM #2 – EQUALIZED ASSESSED VALUATION (EAV)

• Is the government’s way of determining property’s value.

• Your property’s value determines how much of the total tax request you will pay.

• In general, EAV = 1/3 of a property’s assessed value.

• Assessed Value is not necessarily what you could actually sell your house for.

• Assessed Value is most accurate at time of sale and becomes less accurate over time after that.

Commercial

Residential

A home or business that could be sold for (is “worth”) $300,000 may or may not be ASSESSED at $300,000 due to inefficiencies in the assessment process.

A home assessed as “worth” $300,000 = $100,000 EAV

Always Remember…Government ≠ Logical

How much tax can the District collect from the Community as a whole?

Last year’s total taxes, increased for inflation and any new additional value created from new building.

Hypothetical Community :(2003)

EAV Tax Rate TaxesHome 1 $100,000 0.04 $4,000Home 2 $100,000 0.04 $4,000Home 3 $100,000 0.04 $4,000Home 4 $100,000 0.04 $4,000Home 5 $100,000 0.04 $4,000Business 1 $500,000 0.04 $20,000

Total $1,000,000 $40,000

How Much Can Hypothetical School District Collect In 2004?

1. Two steps (add results together to get answer)

a. Increase last years taxes by Consumer Price Index (Assume 2.5% CPI.)

$40,000 x 1.025 = $41,000 Total Taxes

b. Increase last year’s taxes by NEW EAV x Last Year’s Tax Rate.

$2,000 EAV x .04 Tax Rate (Last Year) = Additional $80 Taxes

RESULT:

$41,000 + $80 = $41,080 In Total Taxes

NEW

2. Apply Reassessment To Get EAV (Year 2): Assume Homes Get Reassessed and Assessment Goes Up 10% and 1 Home is Sold for $345,000 so their assessment goes up more than rest.

Value EAVHome 1 $330,000 $110,000Home 2 $330,000 $110,000Home 3 $330,000 $110,000Home 4 - Sold $345,000 $115,000Home 5 $330,000 $110,000Business 1 $1,650,000 $550,000

Total $3,315,000 $1,105,000

SOLD

How Much Can Hypothetical School District Collect In 2004?

How Much Do Individual Property Owners Pay?

1. Determine New Tax Rate

Maximum Tax = 41,080EAV = $1,107,000

41,080 / $1,057,000 = 3.71093% Tax Rate

EAV Tax Rate TaxesHome 1 $110,000 0.0371093 $4,082Home 2 $110,000 0.0371093 $4,082Home 3 $110,000 0.0371093 $4,082Home 4 $115,000 0.0371093 $4,268Home 5 $110,000 0.0371093 $4,082Home 6 $2,000 0.0371093 $74Business 1 $550,000 0.0371093 $20,410

Total $1,107,000 $41,080

2. Determine Individual Property Owners Taxes

Assessment Tax Tax RateIncrease Increase Change

Home 1 10% 2.05% -0.28%Home 2 10% 2.05% -0.28%Home 3 10% 2.05% -0.28%Home 4 15% 6.70% -0.28%Home 5 10% 2.06% -0.28%Home 6 100% 100% -0.28%Business 1 10% 2.05% -0.28%

What Number Is Important?

To a certain extent all factors are important, but yourAssessment increase and the tax rate are just factorsTo the real important number – How much more you pay.

How Much Do Individual Property Owners Pay?

Important Lesson #1: The total amount the school district can collect can only go up by inflation. New building also increases the total amount

Important Lesson #2: Your increase in assessment does not tell you how much your taxes go up.

Important Lessons:

To answer this, we have to answer a question with a question.

Is the Consumer Price Index a good representation of what the district should see as the increase in the cost for the things they buy to run our schools?

Why Can’t The DistrictMake Do With What They Have?

The CPI represents a “basket” of goods and services purchased for consumption.

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks);

HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture);

APPAREL (men's shirts and sweaters, women's dresses, jewelry);

TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance);

MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services);

RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions);

EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);

OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

The district’s major purchases:1. Teachers Wages2. Medical Expenses & Other Employee Benefits3. Transportation & Gasoline4. Energy (Electric & Gas)5. Services (Specialized Education, Legal, etc)

Correlation between these items and the National CPI islow, except by happenstance.

Primarily because:

National CPI is too diversified a “basket” of products and services”

National CPI has other geographic regions represented and we buyour goods locally. What does the price of chicken in Champaignhave to do with what we have to pay teachers here?

The district’s major purchases:

1. Wage Costs2. Medical Expenses & Other Employee Benefits3. Transportation & Gasoline4. Energy (Electric & Gas)5. Services (Specialized Education, Legal, etc)

The cost of these things go up faster than the CPI becauseCPI is a poor indicator of what they should go up by.

Why Can’t The DistrictMake Do With What They Have?

Why Cant The School District Make Do With What they Have? –

Because Tax Cap Suppresses Inflation of Taxes Artificially Below The Inflation Rate Of The Services We Provide.This Creates Deficits Eventually. Growth in Expenses (90% Wages)

Growth in Revenue Under Tax Cap

Surplus

Deficit

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

They Can. Choice #1 Drive Expenditure Line Down.

2002 2003 2004 2005 2006 2007

Growth in Expenditures (90% Wages)

Growth in Revenue Under Tax Cap

Surplus

Why Cant The School District Make Do With What they Have? –

2002 2003 2004 2005 2006 2007

Growth in Revenue Under Tax Cap

2008 2009 2010 2011

Growth in Expenses

Drive Expenditure Line Down By -a. Decreasing Number of Teachers.

by Increasing Class Size or Reducing Programs Cumulatively Year After Year Or b. Neglecting our Infrastructure Or c. Spending Down Cash in The Bank(or some combination of those three possibilities)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Revenue Under Tax CapWithout Referendum Increase

Year 7 Year 8 Year 9 Year 10

Expenses

Cutting Expenditures - Cumulatively

This was how the district operated for 30 years.

Result:

• We had to replace all of our old, neglected buildings• School was held in trailers• We were borrowing money to even out cash flow• We had sub-standard ratings• We had less administrators than made good sense• We had not addressed many educational issues.

Mismanagement? No - Adjusting Financial Realities.

This was how the district operated for 30 years.

2002 2003 2004 2005 2006 2007

Growth in Revenue Under Tax CapWith Referendum Increase

Referendum Increase

Solution 2 – Increase Revenue Line Periodically By Referendum Maintains Steady State and Good Fiscal Management.

2008 2009 2010 2011

Referendum Increase

Growth in Expenditures (90% Wages)

Providing Sufficient Operating Taxes Has Allowed The District to:

1. Maintain our buildings and put a systematic way to provide for protecting our investment in infrastructure.

This will save the district money in the long run.2. Have 1 ½ months worth of operating expenses in the

bank to even out cash flow. This has saved the district the interest on short term borrowing and given us a safety net for unforseen expenses.

3. Add teachers to the system as our student population has grown. This helps to maintain current district class sizes.

4. Initiate improvements to our math curriculum as recommendedby CA220.

5. Initiate improvements in our reading support to children whoNeed it as recommended by CA220.

6. Initiate limited test programs like all-day kindergarten and dual language Programs to help improve the one area where our performance is mostIn need of improvement.

• Home values continue to be strong• Our Student Performance has been

excellent and improving• Our Schools are safe, pleasing places

to be proud of• Our District’s reputation is excellent

The Payoff

What does the district do to make sure they are economizingand using our resources wisely?

1. Balanced Budget Process2. 5-Year Financial Plan3. 5-Year Facilities Plan4. Rigorous Resource Allocation Process